Opec officials struggling to explain why oil promptly surged to $80 a barrel after its attempt to cool the market with a 500,000 barrel a day production increase pointed to the attacks on gas and oil installations in Mexico on Monday as part of the reason why the group’s efforts had been ineffectual.

This Reuters story points out that these attacks are a worrying sign, in a country that is one of the world’s top ten oil producers, even if it has been in decline.

As Adam Sieminski, chief energy economist of Deutsche Bank, is quoted as saying in that piece: "If it gets worse, it would likely have a more significant impact on the global markets."

It did not take long for the oil market to deliver its verdict on Opec’s production increase. Just over 24 hours after the announcement that the goup would pump an extra 500,000 barrels a day, oil has surged to a new record of $80 a barrel.

Technical factors are part of it. Traders say there are big speculative positions in call options that will pay off above $80, and the hedge funds want to force the price up so they can collect.

But it also sheds an interesting light on the power of Opec. The economist James Hamilton makes a persuasive argument that Opec is not "a functioning cartel", but instead "a group of countries loosely announcing what individually they’d each pretty much want to do on their own anyway." (His work on Saudi Arabia’s oil production and potential is also interesting, although highly contentious.)

In a sense,it helps Opec to dispel its image as a sinister all-powerful cartel that can hold the world to ransom. The ministers always say: "we do not set the price"; the past 24 hours have proved their point. On the other hand, being exposed as ineffectual cannot be good for Opec either.

The timing was unhelpful, to say the least. As Javier Blas reports, the day after Opec agreed to raise its production, the International Energy Agency said the world would need less oil in the second half of the year than it had previously thought. It has cut its estimate of demand in the fourth quarter, which is when the Opec output hike will take effect, by 250,000 barrels a day to 87.8m, and cut its forecast of the "call on Opec" even more, by 300,000 b/d. That is not really the best possible support for the IEA’s argument that Opec should have done more. (The headlines from today’s IEA oil market report are on its site, although full details are not available to the public for another two weeks.)

However, even the IEA’s new prediction of fourth quarter demand is still some 700,000 b/d above Opec’s own  If the IEA is right, the market that is already tight, as Opec’s head of research Hasan Qabazard put it (watch the video here), will get even tighter. The reaction of the oil market suggests that no-one is worrying about flagging demand just yet.

Yet the IEA’s decision to cut its demand forecast was a result largely of a lower baseline being set by the numbers for June and July, when there was mild weather and some switching away from oil to other fuels. If the subprime crisis begins have a significant effect on global growth, then the oil market may look very different. As the IEA says "we may further revise our 2008 forecast as events unfold."

You think $78 a barrel for Brent crude oil and $3 a gallon for petrol is high? Wait until the winter and today’s prices will seem like a bargain, warns Goldman Sachs.

Oil prices have risen within a whisker of their all-time highs. On Monday Brent crude oil hit an intra-day high of $78.40 a barrel, just 25 cents below last August’s all-time high of $78.65 a barrel (here the FT’s story). Investors cashed in their profits on Tuesday sending Brent crude oil down to $76.00 a barrel.

Looking ahead, the US investment bank said on Monday in a report that oil prices could hit $90 a barrel by the autumn and $95 in winter unless the Organisation of the Petroleum Exporting Countries increases its output.

Jeffrey Currie, of Goldman Sachs in London, said: "An increase in Saudi Arabian, Kuwaiti and United Arab Emirates production by the end of the summer is critical to avoid prices spiking above $90 a barrel this autumn."

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The International Energy Agency, the industrialised countries’ energy watchdog, on Friday said oil demand in 2008 will grow by 2.5 per cent to 88.2m barrels a day (the FT story is here) in spite of record high oil prices.

It also called for Opec to increase its output to avoid a tight oil market in the second quarter of the year. Oil prices, meanwhile, are rising.

The acceleration in demand growth of 1.5 per cent this year suggests that the traditional relationship between oil prices and demand is breaking apart. Or is it?

If you have asked the Energyfilter team five years ago what would happen with oil demand if prices averaged in any year $65 a barrel, the response would be: a sharp drop! For the record, Brent oil price averaged $66.1 a barrel in 2006 and so far this year the price average is $64.5 a barrel.

But prices still matter, although far less than they did in the 1980s and 1990s. Last year, the IEA also projected strong demand growth for 2007, only to be forced to cut that estimate as ongoing oil prices dent some of the consumption increase.

That transformed a forecast published just a year ago for oil demand growth in 2007 of 1.8 per cent to another now of 1.5 per cent. Still, that is peanuts if you think about how tight supply is.

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The International Energy Agency, the industrialized countries’ energy watchdog, on Monday warned on a crude oil “supply crunch” in the next five years on the combination of strong consumption and lagging supply.

The IEA said that “oil looks extremely tight in five years time” and there are “prospects of even tighter natural gas markets at the turn of the decade.”

Although the energy watchdog is not in the business of predicting oil prices, analysts said that the IEA’s balance of supply and demand pointed to a growing risk of higher oil prices to 2012. However, an increase in refinery flexibility and capacity could help to ease the price pressures.

In summary, here is the bad, the very bad, the good news and debate:

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Pemex, Mexico’s national oil company, has leased a new semi-submersible rig for deep-water drilling in a five-year deal worth almost $1bn. The rig, which is due to be completed by the end of 2009, will be able to operate in 5,000ft of water. Pemex only started exploring the deep water of the Gulf of Mexico in 2004, and is claiming some success in its exploration efforts. The question is whether the company will be able to develop any discoveries that it makes quickly enough.

Mexico certainly needs to do something, because its oil production has been in decline since 2004, according to the BP Review of World Energy. The US Energy Information Administration highlighted the issue in its recent  International Outlook (pages 33-35), which took a much more negative view of Mexico’s future production than last year’s report. The prognosis has got Alan Greenspan worried about the country’s financial future. Cantarell, Mexico’s biggest field which produces about half the country’s oil, is in pretty steep decline, a fact that was predicted by some three years ago.

The problem, however, is that Mexico’s constitution largely forbids investment by foreign oil companies, a position enshrined in Nafta. Felipe Calderon, the president, has suggested he wants to change that. Unless he does, the exploitation of the Mexico’s deep waters is likely to proceed only slowly; probably too slowly to save Mexico from becoming a net oil importer at some point over the next ten years or so.

The price of oil fell sharply on Wednesday (FT story here)  after US Energy Information Administration figures showed US crude stocks rising by 6.9m barrels to their highest for nine years. The figures have been challenged; a note overnight from Adam Robinson of Lehman Brothers asks: "Is the US refinery system broken, or are EIA surveys?"

But taken at face value, the data certainly support the Opec argument that there is no need for its members to raise production yet, because it is not a shortage of crude supplies that are driving gasoline prices higher, but low refinery utilisation. Whether the high level of stocks means the price of oil is going to fall, however, is another matter. It is often argued that refining tightness also pushes up the cost of crude, and even without that effect, the supply / demand balance for the second half of the year looks tight.

For now, meanwhile, the oil price is supported by the Nigerian general strike.  This threatens oil exports only if prolonged, my colleague Dino Mahtani writes from Lagos. Edward Meir of Man Energy argues: "expect another modest leg lower [in the opil price] if the government buckles and ends the strike by rolling back price increases, as we expect them to do."

However, at the Oil Drum blog, Jeff Vail, an energy analyst with a homepage here, warns against ignoring the importance of "above ground factors" such as political disputes, strikes and armed conflict. He writes: "What we should not do is think that ‘above ground’ somehow means either ‘temporary’ or ‘less serious.’

Oil prices are being driven higher by a general dip in US petrol supplies, as Ed Crooks wrote yesterday. This is one of those counter-intuitive abnormalities that makes energy fun or frustrating, depending on your disposition. But it’s true, even though you may be hesitant to believe Abdalla Salem El-Badri, Opec’s secretary-general, because he has reason to want to downplay any blame attributable to the cartel, which has recently restricted its oil output to push prices up. See the AP story here. Instead, believe US refiners who are privately admitting to having trouble performing their regular scheduled maintenance on time, and for that matter on budget.

What is interesting is the reason: The general lack of parts and labour in a market of high demand that is making it more difficult to do everything from drilling new wells to retooling refineries. Now if only someone would come up with a better explanation than ‘psychology’ as to why refining less crude into petrol should drive crude prices up, rather than down. If you do, please do send us a comment…

Chevron, the US’s second largest energy group, is close to admitting it should have known kickbacks were being paid to Saddam Hussein, during Iraq’s oil-for-food programme with the United Nations, Claudio Gatti of Il Sole 24 Ore, the Italian newspaper, reports. For an English version, picked up by the New York Times, go here. Chevron will pay $25m-30m in fines, about how much it earned in half a day’s work last year. But if the settlement with US attorneys goes ahead, it sets a precedent for other major oil companies, almost all of which, were accused in a report by Paul Volcker, former chairman of the Federal Reserves, of having bought Iraqi oil through middlemen who paid kickbacks on their behalf.